PRESENTED BY :

ARMANDO CARLOS ,

SVP, MSB BUSINESS DEVELOPMENT, UNIVERSAL BANK

A R M A N D O C @ U N I V E R S A L B A N K . C O M

6 2 6 - 8 5 4 - 2 8 1 8 , E X T. 1 2 6 U N I V E R S A L B A N K

MONEY SERVICE BUSINESS

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What is a Money Services Business?

MSBs are non-bank financial institutions that provide one or more of the following financial services:

Note: MSBs operating in California that provide check cashing services must maintain a check cashing permit from the State of California. California Department of Justice maintains a list.

• Currency Dealer or Exchanger

• Check Casher

• Issuer of Traveler’s Checks, Money Orders or Prepaid access (formerly Stored Value)

• Seller or Redeemer of Traveler’s Checks, Money Orders or Prepaid access (formerly Stored Value)

• Money Transmitter

• U.S. Postal Service

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What is a Money Services Business?....CONTINUED

1. To qualify as an MSB the business must conduct more than $1,000 in business with one person in one or more transactions on the same day in one or more of the financial services.

1. The threshold applies separately to each activity -- if the threshold is not met for the specific activity, the person engaged in that activity is not an MSB on the basis of that activity.

2. EXCEPTION: Providing money transfer service in any amount. No

threshold.

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Regulatory Authorities USA & other countries

MSBs are a common place in many parts of the world that are subject to regulatory oversight. Some examples of Global MSB Regulators include:

The United States: In the United States, MSBs must register with the Financial Crimes Enforcement Network (FinCen), be reviewed by the Internal Revenue Service (IRS), and comply with any relevant state and federal laws.

The United Kingdom: MSBs must register with either the Financial Conduct Authority (FCA)or Her Majesty’s Revenue and Customs (HMRC), depending on the specifics of their business.

Canada: Broadly similar to the United States in terms of regulations, MSBs in Canada must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Hong Kong: In Hong Kong, MSBs are known as money service operators (MSO), and are required to apply for a license from the Customs and Excise Department in order to conduct business. MSOs in Hong Kong must abide by the Anti-Money and Counter-Terrorist Financing (Financial Institutions) Ordinance.

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MONEY SERVICE BUSINESS Registration

MSBs must register with the Financial Crimes Enforcement Network(FinCen), be reviewed by the Internal Revenue Service (IRS), and comply with any relevant state and federal laws.

Every MSB must register with FinCEN by electronically filing form 107 within 180 days after the date on which the business is established and must be renewed every two (2) years.

MSBs must obtain a Check Cashers Permit from the California Department of Justice.

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MSBs must have an effective BSA/AML Program

Developing an Effective AML Program The anti-money laundering compliance program must be comprised of the

following five elements:

1)Internal Controls – policies, procedures, and processes to control risks and achieve compliance.

2)Designated BSA/AML Compliance officer

3)Training Certification

4)Independent Testing/Review

5)Beneficial Ownership (Best practice if engaged in commercial check cashing).

The program must be commensurate with the MSB’s operations. The greater the complexity and risk of the MSB, the greater the comprehensiveness of the program.

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MONEY SERVICE BUSINESS & Bank Secrecy Act

The Bank Secrecy Act (BSA) requires many financial institutions, including money services businesses (MSB), to keep records and file reports on certain transactions to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Reporting Cash Transactions

MSBs must electronically file FinCEN Form 112, Currency Transaction Report, when they have a cash-in or cash-out currency transaction, or multiple transactions totaling more than $10,000 during one business day for any one person, or on behalf of any one person.

Reporting Suspicious Activities Generally, MSBs that know, suspect or have reason to suspect that the

transaction or pattern of transactions is suspicious and involves $2,000 or more, must electronically file a FinCEN Form 111, Suspicious Activity Report on the activity.

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TO BANK MSBs, OR NOT TO BANK MSBs, THAT IS THE QUESTION

The biggest challenge that MSBs face today, are being unbanked and/or de-risked by financial institutions. Many banks rather sever ties with MSBs than face regulatory scrutiny, reputational risk and/or heavy fines. Some examples of Banks that have been subject to Consent Orders and CMPs for failing to maintain an effective AML Compliance Program, include:

Merchants Bank - In February 2017, FinCen imposed a $7,000,000.00 civil money penalty (CMP) against Merchants Bank of California for willful violations of the Bank Secrecy Act.

US Bank – In February 2018, agreed to pay $613 million in penalties to state and federal authorities for violations of the BSA Act and a faulty AML program. One of the violations was for filing more than 5,000 CTRs with incomplete and inaccurate information relating to the beneficial owners of MSBs.

Citigroup/Banamex - Citigroup agreed to pay $97.4 million. One of the Red Flags Banamex USA did not heed was $1.3 billion in remittances that each totaled more than $1,500 — five times the amount that families typically send.

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TO BANK MSBs, OR NOT TO BANK MSBs, THAT IS THE QUESTION…...continued

While MSBs do present an opportunity for financial crime, this risk can be successfully managed through a robust BSA/AML Compliance Program.

However, before a Bank endeavors into whether or not it wants to consider an MSB program and/or continue banking MSBs, the Bank must understand its risk appetite for MSBs.

To understand its Risk Appetite, the Bank should develop a Cost Benefit Analysis to evaluate the Bank’s needs, recent regulatory concerns, monitoring system, tolerance guidelines, strategic goals and Board oversight.

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Risk Appetite

Outline the Bank’s Strategic Plan/direction Costs Benefit Analysis (3 year forecast with supporting doc & methodology)

Number of MSBs, staffing (FTE), marketing, set up fees, application fees, future fee income, management services needed, etc.

• Forecasted future fee income relating to MSBs is the single most important element in determining the number of MSBs that will be opened.

• Continue to conduct further research regarding historical trends from other Banks, including growth rates from the MSB portfolio.

• Address regulatory concerns, refer to other consent orders, etc.

Ensure implementation of Risk Management Systems

Robust AML System, CDD & EDD processes

Experienced BSA/AML/MSB personnel

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Risk Appetite…..continued

Establish Tolerance Guidelines (refer to Appendix “A”) Set parameters and/or guidelines regarding the types of MSBs your Bank chooses to serve.

Type of MSB

Determine type of MSB the Bank will service, i.e. primarily consumer, commercial checking or both along with other services (liquor store, markets, etc.).

Simple, Semi-Complex, Complex

Sources and Uses of Cash

Conduct Sources and Uses analysis (inflows/outflows).

Set tolerance thresholds for MSBs that generate a substantial amount of operating cash, i.e. a percentage from non-financial services such as cash-intensive retail sales, whereby, the transactions and sources of cash are not clearly documented (e.g., POS system or other transaction monitoring system). If the MSB can demonstrate a reliable method of accounting for cash transactions for all products and services sold, the Bank can consider otherwise.

Maintain separate accounts from the MSB and Retail Account to avoid commingling, should the Bank establish an MSB account for cash-intensive business.

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Board & Management12

Communicate to the Board of Directors and Sr. Mgmt.

Establish an MSB Committee Charter Have decision making protocol for MSBs is in place.

MSB Committees can report to the Board and/or the Audit Committee

Monthly ratification by the Board keeps the Board informed.

Whatever the risk, management and the board must recognize the risks associated with banking MSBs. More importantly, train your staff from the front line to the back office.

Appendix “A”13

Other Tolerance guidelinesAverage Transaction

amountAcceptable Services or

anticipatedNumber of Locations Armored Transport

Aggregate MonthlyTrans Amount Types of Checks

Mobile Locations Remote Deposit Capture “RDC”

Service Area Wire Activity HIFCA/HIDTA Status Collateral Analysis

MSB Customers Legal Formation Years in Business Risk Assessment MSB & Bank

Check Monitoring System

Compliance Program Experience of Principals/Employees

MONEY SERVICE BUSINESS14

QUESTIONS?

EMAIL: armandoc@universalbank.com

626-854-2818, ext. 126